Asset Protection Strategies for the Savvy Physician

By Tony Devassy, CFP

Devassy Asset Advisors
Financial Architects for Wealth Building
Courtyard 15419-127th St.
Lemont, IL 60439
(630) 257-7500
tony@yourfinancialarmor.com
Asset protection is a must for physicians in todays litigious society. As jury verdicts in
malpractice suits rapidly increase, fewer and fewer awards are being set aside as excessive, resulting in
skyrocketing insurance premiums for physicians and an increasing possibility of unavailable or
unaffordable malpractice insurance. Malpractice suits not only affect an individuals financial security,
but also affect mental and emotional well being. Thus, it is essential for a physician to have a strong
asset protection plan in place.
Asset protection is not about hiding assets; its about structuring ones assets into a more
favorable form of ownership, and the planning must be done in advance, before the threat of litigation
arises. Insurance alone is not enough: though a physician typically carries $1-$2 million in malpractice
insurance, in 1999, the average jury awards for malpractice rose to $3.49 million, and awards continue
to rise every year. (New York Times, 9-13-01). Further, given the reality that insurance carriers often
go bankrupt, insurance should not be used as a sole asset protection planning tool. PIE Mutual
Insurance Co., Ohios largest medical malpractice insurer, declared bankruptcy in 1998, leaving 18,000
doctors without any insurance coverage. (New York Times, 9-10-01). Thus, insurance cannot be the
sole avenue of protection.
There are some commonly known so-called asset protection strategies that actually do very
little to shield assets from potential creditors. One such traditional tool is putting a significant amount
of money into the home in the hope that the homestead exemption will protect the individuals assets.
Under the homestead exemption, the value of real property is protected or exempt from judgment for
debts to some extent. However, this method is hardly foolproof. Though Floridas homestead
exemption is unlimited, other states typically limit the exemption anywhere from $5,000-$10,000. For
physicians with any significant equity in their homes, this strategy is almost meaningless. Another
common misconception is that gifting to the physicians spouse will protect the assets. However, in a
majority of states, a gift is exempt from the definition of marital or community property; therefore, if
theres a divorce, the recipient spouse keeps the property and gifting spouse gets nothing. Further, the
physicians spouse may be the subject of a lawsuit as well at some point in his or her life, thus
subjecting the assets in the spouses name to creditors. Finally, though a professional corporation may
provide some protection against the possible torts claims of the physicians employees, it will not
provide protection against a physicians malpractice claims. Because a person cannot protect himself
from his own negligence by creating the profession corporation, the physician would still be
individually liable for any malpractice claims.
There are various other asset protection strategies a physician can utilize for a more effective
plan. A family limited partnership (FLP) is a tactic in which assets are transferred to the FLP in
exchange for general and limited interests in the trusts. Basically, an FLP separates ownership of the
assets from control of the assetsthough the FLP actually owns the property (and thus the property is
not owned by the physician), the partners that make up the FLP control the property. Therefore, if the
physician retains the general partners interest, the physician can still control the assets while not

technically owning them. An FLP is favorable because a creditors remedy against it is a charging
order, a restricted remedy. However, there are some disadvantages as the physician has limited access
to the FLPs assets if a charging order is obtained, and in the future, courts may expand creditors
remedies against FLPs beyond charging orders.
Another planning strategy on the horizon is the so-called Alaska Trust, though other states
like Delaware, Nevada, and Rhode Islandhave come up with similar trusts. A trust is an entity in
which property is held for the benefit of another, the trust beneficiary. Typically, a settlor cannot create
a trust and name himself as the beneficiary. However, Alaska and other states have created laws in
which a settlor can set up a trust to protect his assets from creditors and name himself as the
beneficiary. Alaska Trusts, however, are probably as too good to be true as they sound. First, though
an Alaska Trust would probably hold up in a lawsuit between two Alaska residents, it is unclear how
state and federal courts would rule if someone with an Alaska trust is sued by a non-Alaska resident
over an issue that occurred outside of Alaska, as this issue has never been tested. Further, if a creditor
obtains a judgment against a physician with an Alaska Trust in Alaska, he can enforce the judgment in
any of the United States, thus relieving the physician of Alaskas protective laws. Thus, Alaska Trusts
are not foolproof.
The safest bet for asset protection appears to be the offshore asset protection trust (OAPT).
Though offshore planning may sound dubious, its completely legal as long as the trust is not used to
evade income tax. There are two basic types of trusts in this contextdomestic and foreign. Domestic
trusts are settled by a person living in the US and are governed by state law, while foreign trust are
settled in an outside country and are governed by that countrys laws. Though US law provides that a
trust cannot be created by the settlor for the settlors own benefit, the law of some foreign countries
in particular, Cook Islands, Bahamas, Nevis, and Barbadosprovide otherwise. Thus, under certain
more favorable foreign trust law, a settlor can freely transfer assets to a family trust in which he or she
is the beneficiary, and the transferred assets are excluded from the estate for purposes of future creditor
attachment. An OAPT can greatly discourage a preying creditor from going after a physicians assets.
Suit against the OAPT would have to be brought in the country under which the trust was formed,
creating financial and psychological barriers to the creditor. Also, foreign courts do not have to follow
US trust law and can instead apply their own more favorable law.
In this age of instant communications and international banking facilities, creating an OAPT is less
burdensome than one would imagineits as easy to hold accounts and assets overseas as it is in
another city in the US. The OAPT has been tested and upheld, thus providing more predictability and
stability for those who were wise enough to utilize this strategy.
Another investment-savvy strategy is to turn a physicians accounts receivable into a protected,
income-generating asset. Heres how it works: an accounts receivable is monetized with a loan so that
the physician is both able to retain the accounts receivable and have a separate pool of assets in cash.
Once the collateral has grown to the point where the lender feels comfortable, the physician can make
withdrawals at will. However, the even smarter investment is not to withdraw on the accounts
receivable, but to use the pool of cash assets to purchase a life insurance policy or annuity as the doctor
then gets use of a typically dormant asset without selling or interrupting the flow of the accounts
receivable. The advantage of putting the cash assets into such a policy is that the physician has both
life insurance protection and the benefit of growing the cash value of that policy on a tax-deferred
basis. The assets are also protected from liability threefold. First, in many states, life insurance and
annuities are protected from litigation. Second, there is a Uniform Commercial Code lien on the
receivables, so that anyone who makes a claim on the accounts receivable balance would have to be at

least second in line after the primary lienholder. Finally, the cash value of the life insurance policy or
annuity is protected as it is pledged back to the lender.
Regardless of the tool a doctor decides to optimize, it cannot be overstated how important asset
protection is to a physician. Our overly litigious society, coupled with sky-high malpractice judgments
and premiums, result in endangering physicians hard-earned wealth. Asset protection strategizing
before a creditors claim arises is not only good practice but also the only way to do it legitimately
any shifting of assets after a claim arises is an illegal fraudulent conveyance. Thus, the time for asset
protection planning is the presentact now before it is too late!
Registered Representative of and Securities Offered Through QA3 Financial Corp., Member
NASD/SIPC
Investment Advisor Representative of and Advisory Services Offered through QA3 Financial,
LLC, an SEC Registered Investment Advisor
Devassy Asset Advisors is not affiliated with QA3 Financial Corp. or QA3 Financial, LLC